February 27, 2009

Heavy Equipment

Economic stimulus packages could make or break equipment manufacturers

IAN HARVEY

correspondent

With the economy stalling and construction projects shutting down for want of funds, prospects for heavy equipment manufacturers and their dealers aren’t rosy.

Most are anxiously waiting to see which way the chips will fall: Will stimulus packages announced by governments around the world include enough infrastructure projects to trigger investments in new equipment or will it fall short of expectations with money going to shore up social safety nets and training programs?

It’s the trillion dollar question and so far the news isn’t entirely positive.

“No one has a crystal ball but at first blush, from what I’ve seen in the headlines, there’s not as much infrastructure as I’d have anticipated,” says Craig J. Olson of John Deere’s Construction & Forestry Division in Illinois. “With infrastructure crumbling the way it is in America you could easily spend $100 billion on bridges alone and $100 billion on wind power, airports or the power grid.”

He says there are many projects across the continent which have completed engineering studies and environmental assessments and are just waiting on funding.

“Still, despite the economy, we think we will do all right,” he says. “We’ve continued to innovate and we have some new products coming out which will help.”

The trend is clearly downward as the American General Contractors Association noted in a December member survey of 236 respondents who reported they had seen or expect a downturn in highway (93 per cent); building (92 per cent); utility (84 per cent); water resources (78 per cent); other public work (91 per cent); and private construction (96 per cent).

Three-quarters had laid off workers in the past 6-12 months as a result of the downturn; the median response was about 30 per cent of the workforce laid off.

Worse still, nearly two-thirds expect further layoffs in the next six to 12 months.

However, 86 per cent said if their state received extra federal funding and was able to put additional projects out to bid, they would avert layoffs and/or hire additional workers.

The ripple effect is already cutting into the sector. Caterpillar Inc., the world’s largest maker of construction and mining equipment is set to lay off 814 production workers at an engine assembly plant in Mossville, Ill starting any day now.

Finning, the Vancouver-based dealer of heavy equipment to the mining and construction industry also laid off more than 500 employees from a head count of more than 12, 000 globally.

Some players in the sector, however, remain buoyant. Peter Blake, CEO of heavy equipment auctioneer Ritchie Brothers, says either way heavy metal will still sell.

“We’ve been around for a while and through a few of these cycles,” he says. “And we have good growth in good time and do better in bad times.”

He says Ritchie has about $3.5 billion of the $100-billion market globally for heavy equipment and will continue to grow their share because it brings a unique value to the table for those looking to sell or buy equipment.

While about half of its 2008 revenues of $3.57 billion US (up 12 per cent over 2007 from 193 industrial and 147 agricultural auctions), come from the U.S.; Canada accounts for about 15 per cent, as do Europe, Dubai and Australia.

“There are still opportunities in Poland and we’ve been working hard to set up sites in China and India which are coming on stream,” he says. “And there’s action in North Africa.”

The upshot is that because Ritchie’s auctions are online, buyers in areas where there’s still activity can take advantage of dropping prices in North America and Western Europe.

“Our end users are very sophisticated people,” Blake says. “They’ll jump on a machine and have it making money the next day.”

The other equipment sector which could swing either way is the rental market. While big guns Hertz, United Rental and Stephenson’s are all feeling the pinch, there’s some hope that instead of buying or long term leasing equipment, contractors will rent on an as needed basis.

“Certainly we’re hoping that may be the case and we’re waiting like everyone else to see what is in the stimulus package in terms of infrastructure,” says United Rental’s Fred Bratman Vice President, Corporate Communications and Investor Relations.

“There are a lot of companies in distress trying to sell equipment but I’m not sure there are willing buyers,” says Ken Simonson, chief economist for Arlington, Va.-based Associated General Contractors of America.

However, he says, if the stimulus package does inspire an uptick in construction activity, he suspects rental companies may be the first beneficiaries.

“That would be my guess,” says Simonson. “If they do win contracts they’ll either dust off the machinery they have parked, rent or buy used before they spend on some new fancy stuff which is probably going to impact the dealers and manufacturers. Then there’s also the question of whether they can thaw the credit market enough so that those looking to buy or lease can get some help.”

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